FILE PHOTO: U.S. President-elect Donald Trump speaks at the America First Policy Institute (AFPI) gala at Mar-A-Lago in Palm Beach, Florida, U.S., November 14, 2024. REUTERS/Carlos Barria/File Photo
LONDON: Broad Reach Investment Management LLP is shorting major emerging-market currencies, saying investors haven’t yet fully priced in disruptions to come from President-elect Donald Trump’s tariff policies.
The US$1.8bil London-based hedge fund is shorting the Mexican peso, along with currencies in North Asia, the Middle East and Eastern Europe, chief executive officer Bradley Wickens said in an interview.
That marks a change for the fund, which has generated a 20% return so far this year by betting on distressed emerging-market credit, frontier credit, and carry trades among others.
“There are lots of opportunities next year, but it’s going to be a faster market that requires agility and a market that is more going to be foreign exchange-dominated in a tariff-led 2025,” Wickens said.
“It’s not a credit-driven market like in 2024.”
Investors who haven’t yet positioned for Trump’s anticipated tariff onslaught, or who are still questioning whether it’s just a negotiation tool rather than a policy pledge, are likely to be caught off guard, according to Wickens’ thinking.
Out of 32 major emerging and frontier-market currencies, 24 have lost value against the dollar this year, and Wickens is betting on things getting worse.
This week, the benchmark MSCI EM currency index wiped out 2024’s gains, trading 0.5% lower on Dec 19.
“If it’s a policy, markets have got a lot further to go in terms of pricing,” Wickens said, referring to Trump’s tariff proposals.
“We expect Trump to move quickly on Chinese tariffs as the execution plan is already oven-baked.
“Trump will almost certainly change the global political and economic landscape,” he added, forcing changes in asset-price trends and portfolio flows across emerging markets.
One of the fund’s currency shorts is Mexico, which sends the bulk of its exports to the United States.
North Asia also gets targeted because asset allocators haven’t fully priced in rising trade tensions and US tariffs, Wickens said.
Others are in the Middle East, where Wickens anticipates that Trump will remove the effective veto that the Biden administration has imposed on Israeli strikes against Iranian nuclear facilities.
And finally he’s shorting currencies in Eastern Europe because he expects Trump’s stance on the North Atlantic Treaty Organisation and his determination to seek a swift end to the war in Ukraine will lead to rising geopolitical risk premia across the board.
“To some extent the winners will be the ones that aren’t the clear losers,” Wickens said.
“If you are not China and North Asia, Mexico, or if you are not Europe, beyond that, you can be a winner.”
Among potential winners, he bets that Turkiye “gets largely left alone” and along with energy importers like India, could benefit from lower prices as Trump deregulates the United States oil industry.
Countries including South Africa and Nigeria are less likely to suffer from US trade tariffs, he said, while in Latin America, everything south of Mexico could be a winner.
“All of these trades can be constructed with North Asia, China, South Korea, Taiwan as the funding currencies, maybe a bit of yen and euro as well,” Wickens said. All of these currencies are going to be challenged by tariffs and that sets up a very nice funding mix.”
After another disappointing year for many emerging-market investors, the biggest winners of all may be hedge funds themselves.
“Trump brings both dispersion and volatility to asset prices, but he also ignites animal spirits,” Wickens said.
“The combination of increased dispersion and new trends should be a boon for hedge funds in the coming years.” — Bloomberg
